Tax dollars siphoned as credits go unchecked

Under a law designed to give property-tax relief to individual homeowners, Maricopa County gave at least $1.2 million in rebates to owners of multiple residences, including investors in rental homes and apartments, records obtained by TheArizona Republic show.

Elected county officials say they have known about the problem for at least five years and have taken some steps to correct it to collect the tax dollars. But they add that they don't have the staff or funding to aggressively crack down on those who may be receiving rebates illegally.

"I wish I had the resources to be more proactive," said Maricopa County Assessor Keith Russell, whose office plays a key role in determining who gets the credit. "If we invest more resources here, we are taking away from other programs."

All property in Arizona is taxed based on how it is used.

To get a homeowner tax credit, a property buyer files a sworn affidavit with the county recorder saying the home will be owner-occupied or that a relative will live there. If the buyer indicates that it is a rental, no credit should be provided.

The recorder passes the information to a county assessor, who classifies the property. That helps determine how much a treasurer collects in taxes.

Rebate's intent

Arizona for three decades has taken money from its general fund to provide an "owner-occupied" property-tax rebate to cover part of a homeowner's taxes for local schools. But the rebate is largely unknown to many who receive it, and rental properties are not legally entitled to it.

The Republic, however, found thousands of Valley rentals receiving the tax credit because the properties were improperly classified as owner-occupied in county records. Credits also were being given to a time-share operation, an individual who listed his address at a Valley resort, even a California company that specializes in debt collection and buying distressed homes.

This giveaway for unqualified properties, most of them investment or business ventures, has happened even as the state has shuttered programs, laid off employees and closed highway rest stops because of budget woes.

"It is ridiculous," said Darlene Justus, a north Tempe resident who has informed elected officials about the problem the past few years. "We are paying for those people to do business in our neighborhoods. And that is wrong."

In 2006, a lawmaker successfully pushed for a bill calling for the state Department of Revenue to examine how counties were monitoring the distribution of credits for owner-occupied homes. The department last year found none of the 15 counties was imposing penalties on property owners who failed to advise an assessor when a property changed from residential to rental use.

Many properties have been reclassified to their proper designations.

The state saved $4.3 million in fiscal 2009, when 23,671 properties were reclassified as rentals. The biggest savings came in Maricopa County, where 14,624 properties were reclassified as rentals and $3 million was saved.

The Revenue Department was unable to determine whether the changes came from any efforts by the counties or if owners were voluntarily reclassifying the properties.

Thousands of other properties still get the credit that probably should not.

"Everyone agreed it was a problem and wanted to do something about it," said Laura Knaperek, a former lawmaker who in 2006 helped get a bill passed that called for more oversight of the rebate. "It appears nobody is following up on this, and the state is losing money."

"This ought to make people mad," Knaperek said.

Cities get smart

While Maricopa County says it is too short-handed to address the problem, a few Valley cities have aggressively gone after investors who have residences classified as owner-occupied but are renting them and not paying sales taxes. In many cases, rent payments are considered taxable sales.

Tempe and Chandler said they generated windfalls, and at low cost to the cities. They said they offered to share their findings with the county assessor but were turned down.

Chandler generated $410,000 this fiscal year by paying one audit intern $13 an hour to cross-reference property records with utility bills to see if a homeowner is renting a property.

"It's absolutely worth it, and it's easy," said Lee Grafstrom, Chandler's tax-audit supervisor. "The first time we tried to pass it on to them (county), the answer came back that it was too much and we don't have the staff available."

Paul Petersen, a spokesman for the Assessor's Office, said the cities were probably talking to the wrong person. He said he would look into any information provided to the county.

Meanwhile, county employees may be contributing to the problem.

Incorrect records

One wealthy California investor has repeatedly filled out paperwork showing he bought 63 investment homes as rental properties and he should not have received any credits. But Maricopa County still gave his investment homes nearly $15,000 in "owner-occupied" tax credits for last year.

"It has been as plain as day these are investment properties," said Connie Schooler, who manages the rentals for her brother, Forrest Lucas, owner of Lucas Oil Products. "We have no intention of cheating Maricopa County."

The Republic informed Schooler in April that county records indicated the homes were classified as owner-occupied. She provided the newspaper with affidavits previously filed with the county that showed the homes, including some bought in November 2008, were designated as an investment or "to be rented to someone other than a family member."

She said she went to the Assessor's Office April 19 and was required to fill out new documents to change the classification and pay a $10 fee per home, even though it appeared the county made the mistake.

"They will not budge, and they will not give us a break on the $10 fee," Schooler said.

Petersen said the fee is part of a rental-registration program that cities use to help collect sales taxes on rentals.

Many claim credit

There are 1,294 owners of multiple properties receiving tax credits reserved for owner-occupied homes, and they own more than 5,000 properties in Maricopa County, records compiled by The Republic show. That breaks down to each owner getting credits for roughly four homes, for a total of $1.2 million in rebate.

Condominium developers and banks or financial institutions that directly own multiple homes are legally entitled to receive the credit. One of the biggest homeowners is Federal National Mortgage Association, or Fannie Mae, which owns 3,146 properties. The county gave Fannie Mae nearly $675,000 last year, though it is unclear whether the government-owned lending giant is eligible.

"We are looking into this matter. Fannie Mae complies fully with all of its federal and state tax obligations," said Janis L. Smith, a Fannie Mae spokeswoman.

The Republic derived the data after filing a public-records request with the Assessor's Office to obtain a list of owners of three or more properties in Maricopa County who receive the credit. The paper then compiled tax data from the website of the Treasurer's Office to determine the amount of credits given, excluding homebuilders, condominium developers and banks. The paper found the names of business owners by reviewing public records from the Arizona Corporation Commission and county recorder.

Detailed findings

The Republic found:

• The state, on average, gave a $988 rebate last year to owners having multiple properties in Maricopa County. That is more than three times the $228 average tax break given to individual homeowners.

• Five companies received tax rebates in excess of $10,000, with the largest rebate, $16,554, going to Links Apartments of Phoenix. The owners could not be reached.

• Jonathan S. Levine of Scottsdale created three businesses that own 49 properties. Those homes received $10,350 in credits. Levine's companies are Casa Calasa, 330 Holdings and 220 Holdings. He said he was "not interested in talking about this" and hung up.

• Seven companies with "rental" in their names owned 40 properties that received $7,201 in tax breaks.

• Real Estate Daddy of Phoenix owns 25 properties that received a combined $5,450 in tax credits through seven businesses that have "Real Estate Baby" in their names. Nancy Rabadi, one of the investors, said all of the properties were rentals and she had "no idea" why they were listed as owner-occupied homes.

In the wake of The Republic's public-records request to examine the problem, Petersen said the Assessor's Office has begun looking into credits given to owners of multiple properties.

History

Lawmakers began the rebate for homeowners in 1980 to give owner-occupied-property owners some relief from local taxes for schools. At the time, the state paid 45 percent of a homeowner's primary property taxes for schools. The credit never was intended for those renting out properties.

In 1990, lawmakers voted to slowly eliminate the program over a decade, and a citizens' finance review commission in 1993 supported that decision.

The 11-person commission said the program was costly to the state's general fund and most homeowners likely didn't even know about it because "few homeowners pay careful attention to their property tax bills" and they pay the tax as part of a monthly mortgage.

"The result is this tax benefit, intended as voter goodwill, may be going largely unappreciated," the commission wrote.

In 1994, the Legislature voted to keep the rebate and stopped the phaseout. Since then, the amount of relief has varied.

Last fiscal year, the rebate covered 39 percent of a homeowner's school district bill or a maximum $580. The total amount of state aid was $423.6 million. This year the rebate will cap at 40 percent or $600 a home.

State law also allows homebuilders and condominium developers to receive the credit until a property is sold. Banks that own foreclosed homes and intend to sell them also receive the credit. Once the homes are sold the credits are transferred to the new owners.

Mike Kempner, a tax-division administrator with the Revenue Department, said there is no limit on the number of residences a person or business can own and still receive the tax credit as long as they are not leased and the intent is to sell them. And owners get the credit even if a property is partially completed.

"You don't have a clear statute saying who gets a homeowner's rebate," Kempner said. "But in a time when we have budget problems, it's definitely an issue."

Little enforcement

Five years ago, when the economy was booming and speculators were snapping up Valley homes, The Republic reported that investors were falsely claiming their rental homes as owner-occupied and draining rebates from the state treasury.

Elected officials expressed concern, yet little was done. Now, county officials are blaming each other for the lack of enforcement.

Back then, former County Attorney Andrew Thomas promised an investigation, but not one property owner has been prosecuted for falsely obtaining the credit. Thomas left office April 5 to run for attorney general and referred questions to staff members, who said no cases were ever referred.

Interim County Attorney Rick Romley last week referred questions to Deputy County Attorney Chris Keller, who said state law allows a county assessor and treasurer to work in tandem to assess civil penalties of two times an owner's property-tax bill for those who violate the law.

But Maricopa County Treasurer Charles "Hos" Hoskins said the state law has no teeth because if a property owner doesn't pay, the county cannot file a lien. "If they get caught, they don't have to pay," he said. "We don't have any enforcement authority."

Hoskins added that the county's budget problems have caused a 24 percent reduction in staff the past two years and the workload has increased, making it more challenging to pursue those who own multiple properties and are getting the credit.

Assessor Russell, whose 322-member staff is roughly the same size as when he took office in January 2005, said he too is short-staffed. He said the county has 1.5 million property parcels and his employees have a larger workload per employee than any county in Arizona and one of the highest in the country. He also said residential properties receive the tax credit by default unless an owner tells the county it's being rented.

He said his office has notified property owners annually since 2007 in their assessment statements that rental properties must be reported, which is required by law.

"It's a difficult challenge to encourage people to be honest," Russell said.

Hoskins said one way to stop the problem is to get action from the County Attorney's Office.

"All it would take is prosecuting a couple of these, and word would get out," Hoskins said.